Independent Directors and Dividend Payouts in the Post Sarbanes-Oxley Era

Coville, T. and G. Kleinman. Independent Directors and Dividend Payouts in the Post Sarbanes-Oxley Era, Advances in Public Interest Accounting (2014, Forthcoming)

Posted: 3 Dec 2013

See all articles by Timothy G Coville

Timothy G Coville

St. John's University - The Peter J. Tobin College of Business

Gary Kleinman

Montclair State University

Date Written: December 2, 2013

Abstract

The manner in which publicly traded companies’ management teams handle their firm’s free cash flows (FCF) has been an issue for many decades, because it is difficult to determine whether these management teams work for their own benefit or for that of their shareholders. Recent financial scandals have heightened mistrust of management. This mistrust, in turn, may have increased the pressure to reduce the portion of FCF left under management’s control. Boards of directors control dividend payout decisions, thus determining the portion of FCF available to corporate management. This article examines whether the 2002 legal response to corporate financial reporting scandals, which came in the form of many new initiatives and requirements imposed by the Sarbanes-Oxley Act of 2002 (SOX) on all publicly traded firms, was relevant to dividend payouts. This question is investigated by noting that the impact of these new requirements differed among firms. Some firms had already introduced the use of independent directors and fully independent committees prior to SOX making them compulsory in 2002. This article examines whether these ‘pre-adopters’ experienced less change in their dividend payout policies than those firms that were forced to change the composition of their board and committees.

This investigation examines the effect on dividend payouts for listed firms attributable to the Sarbanes-Oxley Act of 2002 and concurrent changes in stock exchange regulations that compelled increased use of independent directors and fully independent committees. To study the impact of SOX and the associated, required, changes in the composition of boards of directors for many firms, the difference-in-differences methodology is employed to overcome the endogeneity concerns that have consistently challenged prior governance studies. This was accomplished by examining the effects on dividend payouts associated with the exogenously forced addition of independent directors to the boards of publicly listed firms. The results reveal that there is a significant positive relationship between firms that were compelled by law to change their boards and increases in average changes in dividend payouts and percentage changes in dividends paid, when compared to firms that had pre-adopted the Sarbanes-Oxley corporate board composition requirements. A further exploratory analysis showed the This same significant positive relationship is also is detected for increases in average changes in total dollars distributed, where stock repurchase dollars are combined with dividend payouts. These findings imply that these board composition changes led to decisions that increased dividend payouts in percentage terms, as well as dividend payouts and total dollars distributed in aggregate dollar amount terms.

Keywords: Governance, Independent Director, Dividends, Natural Experiment, Sarbanes-Oxley

Suggested Citation

Coville, Timothy G and Kleinman, Gary, Independent Directors and Dividend Payouts in the Post Sarbanes-Oxley Era (December 2, 2013). Coville, T. and G. Kleinman. Independent Directors and Dividend Payouts in the Post Sarbanes-Oxley Era, Advances in Public Interest Accounting (2014, Forthcoming), Available at SSRN: https://ssrn.com/abstract=2362559

Timothy G Coville

St. John's University - The Peter J. Tobin College of Business ( email )

8000 Utopia Parkway
Bent Hall Room 357
Queens, NY 11439
United States
5166506028 (Phone)
5166211233 (Fax)

Gary Kleinman (Contact Author)

Montclair State University ( email )

NJ 07043
United States

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